Liquidity

When Heading For The Exit, Does Time Or Money Mean More For Startups?

“How much money should my startup raise?”

It’s a simple question that has no simple answer.

Typically, the answer depends on the amount of money it will take for a company to achieve a certain milestone, like releasing a product, growing a sales team, or raising enough capital to make a strategic acquisition. In other words, capital is a means to an end.

Today, inspired by a question asked by a Crunchbase News reader on Twitter, we’re going to see how much money a startup needs to raise to maximize its chances of getting acquired or going public.

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This is a continuation of an unofficial series in which we’ve examined topics like how likely your startup is to get acquired at a particular funding stage, when billion-dollar “unicorn” startups ramp up their M&A activity, and how much your startup needs to have raised to join the top one percent, among others.

And without further ado, let’s get cracking on the numbers. To address our question, we need to go on a little adventure through the data for an answer.

A Look Inside Startup M&A And IPO Data

To answer the question, we started with nearly 100,500 venture funding rounds raised by just over 39,000 companies. These companies are headquartered in the USA that were founded between 2003 and the present-day. This time period is what we’ve called “the unicorn era” courtesy of Aileen Lee and her post naming a new category of billion-dollar behemoths.

Because we’re focused on how funding levels affect exit prospects, we then removed the rounds where the dollar amount raised isn’t known. We’re left with a set of around 31,300 companies to work with. Finally, we placed these companies into different bins based on how much venture capital each company raised and when they were founded.

Most Companies Don’t Raise Much

To give you an idea of the “shape” of the resulting dataset, here’s the distribution of all the companies based on how much they’ve raised.

Unsurprisingly, most companies (nearly half) in our dataset raised less than $1 million in pre-seed funding and nearly 80 percent raised $10 million or less. Going forward, it’s important to keep in mind that we’re working with a skewed dataset with a long, thin tail caused in part by the vertiginous drop-off in company survival after a seed or angel round is closed.

For Reporting And Exits, Age May Matter

But it’s not just how much a company raised that could matter here. Age is likely a factor as well, and this makes sense. Older companies enjoy more time to build their tech (and, ideally, a profitable business), more time in the market, and more exposure to potential acquirers or investment bankers that can help with an IPO.

Below, you’ll find a chart displaying the distribution of companies in our dataset based on the year they were founded.

Now, I know what you’re probably thinking. It definitely looks like startup activity fell off a cliff, but the drop-off is mostly an artifact of how we filtered this data, combined with reporting delays. Remember that we’ve only included companies that have raised a known amount of venture funding. (This being said, venture funding activity has declined significantly, especially in the US, since 2015. Crunchbase News has covered this trend in depth.)

Also, very early-stage companies tend to stay stealthy, and many angel and seed-stage rounds aren’t reported until after a company announces its Series A, which can sometimes be years after being founded or raising seed capital.

Money Matters, But Only So Much

With all this front matter out of the way, let’s get to the part you’ve been waiting for.

In the chart below, we’ve plotted the ratio of exited startups to non-exited startups for each “bin” of total venture funding raised. We derived these numbers by dividing the number of companies that have either been acquired or have gone public by the total number of companies in each bin.

In general, if we don’t factor in age, the $7 million to $9 million range is the sweet spot for maximizing the likelihood of being acquired or going public. And that’s based on results from close to 1,100 companies between those two “bins” of data.

This means that for each additional slug of cash raised between $0 and that $7 million to $9 million range, a company’s chances of finding a final resting place on public markets or in the folds of a larger acquiring company increases. All else being equal, there appears to be a minimum threshold, but after that point, the marginal benefits are negligible and noisy.

Time Really Is Money

But what about time? Recalling that we’ve organized companies by both total funding and approximate age (which we found by subtracting the year a company was founded from 2018, the current year), we can now see the effect age has on exit prospects while controlling for funding.

In the chart below, we’ve plotted the ratio of exited to non-exited startups—organized this time by age cohort—as a function of how much money they’ve raised. In a slight change from the previous charts, we’ve only displayed individual funding bins through $10 million, instead of $25 million, because small sample sizes led to a fair bit of visual and statistical noise after that point.

It’s important to note two takeaways from the above chart:

  1. Although these curves are at different levels, they will all have a similar shape. In general, companies that raised in the range of $0 to $1 million have the lowest share of exited companies in the population, and all of the curves max out in the $7 million to 9 million range.
  2. It’s easy to see here that time really does matter. Note the stratification: older cohorts have a higher proportion of exits than younger ones.

A Word of Caution: Same Takeaways, Different Numbers

There are, of course, plenty of confounding factors that may make the precise figures cited here somewhat inaccurate. Earlier, we mentioned that reporting delays are a factor. It’s also probable that there are some sample bias issues here. Crunchbase and other databases like it tend to capture the most information about the companies that have done the best.

Chances are, the charts would still look the same, but the scales would be different. Like, instead of that close to 30 percent of companies that raised between $16 million and $17 million, the actual number may be 25 percent, or 20 percent, or maybe even lower.

Because it’s difficult to know what’s unknown (to butcher a Rumsfeld-ism),measuring the effect of reporting delays is hard to do here. But assuming that this is a reasonably representative sample, the “key takeaways” should remain unchanged, even if the numbers shift a bit.

Don’t Confuse Ends Versus Means

In some ways, we’ve answered two questions here.

How much funding does it take to maximize a startup’s chances of achieving a successful exit? On average, somewhere in the $7 million to $9 million range.

Which matters more: time or money raised? In all likelihood, it’s time that wins out.

But the most important thing to take away from an article like this is that data isn’t destiny. There are plenty of good teams that get acquired after the first angel check, and there are a large and growing number of companies that haven’t gone public despite raising tens or hundreds of millions of dollars. After all, venture funding is a means to an end, not always an indicator of where you’ll end up.